Two state lawmakers, one from each party, asked the General Assembly’s banking committee reently, to hold an informational forum on a case now before the Department of Banking — a case that’s stretching the bounds of what we thought a regulatory action could look like.
The request marks a highly unusual twist in an already bizarre fight involving a mortgage lending firm, 1st Alliance Lending, that had 178 employees in East Hartford when this mess started in the spring of 2018.
Now the company is out of business. Its principal owner says he has registered a new firm in Rhode Island — though he won’t name it — and said he will open operations in Southbridge, Mass., with the goal of hiring 30 people in the first year.
Clearly, it’s a loss for Connecticut. That’s worth examining, whether 1st Alliance is a rogue operator, as the banking department claims, or regulators launched an out-of-control frenzy, as 1st Alliance and its prominent lawyers charge.
The core issue is whether 1st Alliance broke state and federal laws by having unlicensed employees take applications and/or negotiate the terms of loans. What we know is that 1st Alliance used a model that’s rare or unique in Connecticut, with much of the upfront customer work done by call-center operators who then turned over partially completed applications to licensed mortgage originators.
Twenty months after the state investigation began, we have an endless legal morass. Both sides accuse the other of lying outright in statements to me and other journalists, giving this the feel of a political battle more than a legal case.
And now, fittingly, comes a request that the General Assembly look into it.
“It bothers us that a Connecticut-based company that had over 150 employees and was about to expand, is now out of business,” the requesting legislators, Sen. Dan Champagne, R-Vernon, and Rep. Pat Boyd, D-Pomfret, said in a Jan. 8 letter to leadership of the banking committee. “We are asking you not to take a position in this issue but rather understand how this company and the Department of Banking got locked in a stalemate under the backdrop of Connecticut law.”
The 1st Alliance founder and CEO, John DiIorio, lives in both lawmakers’ districts and his son attends the school where Boyd is a teacher, coach and administrator. So, a favor for an influential constituent (and Democratic Party donor)? Yes.
But it’s far from a typical request to begin with, all the more so because the case is still being heard.
“My gut tells me there’s some overreach in government here,” Boyd said Friday, “and we need to look at it ... There’s a lot of red flags.”
That overreach charge is what DiIorio has claimed all along. I’ve written several columns about this case since the fall of 2018 and I’ve agreed with that view, citing evidence that the department is going about this with uncompromising zeal.
Other states have sanctioned 1st Alliance for violations. Most recently, DiIorio said, the company paid back $115,000 in application fees to 168 borrowers in North Carolina after regulators there said the firm had unlicensed people “assist borrowers in obtaining an application.”
That would be violation in North Carolina but not in the overwhelming majority of states. And North Carolina did not threaten the 1st Alliance license, as Connecticut did, nor demand a fine. DiIorio insists that no state with the same law as Connecticut — the majority — failed 1st Alliance in a licensing exam, even seeing the same facts about how the company operated.
“The banking department publicly filed a death sentence notice on Dec. 5, 2018,” DiIorio said, referring to the notice of intent to revoke the firm’s license. “We are 13 months into this and they haven’t even finished presenting their case.”
The banking department strongly rebuffs any notion that it’s overreaching. The 2018 notice and a subsequent revision last spring make the case that 1st Alliance flagrantly allowed unlicensed employees known as “home loan coordinators” to take would-be borrowers far along the path of a mortgage.
That, the department contends, violates the letter and spirit of a post-recession law, adopted by all states, requiring licenses for mortgage sales.
“There are numerous violations and it’s not just…whether or not he was using HLC’s that were not licensed,” Department of Banking spokesman Matt Smith said. “While he says that we’re not being transparent … he has continued to not provide the emails that we need. We have been more than transparent in everything.”
Smith added, “There are violations of the fair credit reporting act. ... He’s continued this narrative that has said Connecticut is the only one that’s doing this, no other state has found anything, and that’s wrong by his own mouth.
“This guy has a history of violations.”
This goes back and forth forever, with DiIorio refuting all department claims and the department citing all the more inconsistencies. The two sides can’t even agree on whether a key witness — a former compliance director at 1st Alliance — helped or hurt the state’s case. I read the testimony and I can’t tell.
They can’t agree on the legal point that led to the demise of 1st Alliance in the middle of 2019, when the firm, taking an option listed by the banking commissioner, surrendered its Connecticut license.
Commissioner Jorge Perez, himself a significant figure in Democratic Party politics as a former New Haven alderman, didn’t accept the surrender and instead revoked the license, with no chance of appeal by DiIorio because he had canceled his bond.
That revocation meant 1st Alliance, which operated in 46 states, lost its federal mortgage banking approvals.
That’s what the law required, Smith said, accusing DiIorio of admitting he hadn’t read the statute that says the commissioner can’t accept a surrender in an ongoing case.
That’s nonsense, DiIorio countered — the law says no such thing.
Hearings over revoking the firm’s license are underway amid all this. With ten or 12 days of testimony so far, only three of the department’s 16 potential witnesses have taken the stand — one of them in multiple days of excruciating detail, describing events exactly as both sides agreed had happened.
I’ve gone on too long in order to give a flavor, maybe 1 percent of the dispute.
As for the General Assembly forum, Smith, at the Banking Department, said Friday, “We just got the letter today so we really haven’t made a determination yet, but on the face of it, this is a legal proceeding that’s happening and we really don’t feel like we could participate because anything we do is going to be subject to an appeal by the courts.”
Rep. Jason Doucette, D-Manchester, acting House chairman of the committee, didn’t weigh in on the need for a forum, but said, “With the matter pending, I don’t think we’d have a forum at this time.”
There’s no problem holding a forum, DiIorio contends. The procedures are in question in a forum, not the case. “The system cannot deny due process by bleeding the opponent to death.”
Smith counters that the company made unreasonable requests for documents.
Everyone can agree this morass will take years including appeals, and I haven’t even mentioned the two Freedom of Information cases involving 56,000 documents, and the $1.5 million debt 1st Alliance owes the state Department of Economic and Community Development for an expansion deal that went south in part because of this action.
It will not be repaid. DiIorio’s agreement with the state leaves him personally off the hook and his company is out of business.
We can all agree that this is not a good outcome for anyone. Two governors desperately trying to improve the state’s business unfriendly image have not intervened.
Even if the department’s claims are correct, surely there was a better way.